Human Resource Management Delta Case Study: Improving Delta’s Profit Margin Written by Filiz McNamara, Ogochukwu Udekwe and Vicki Troftgruben February 21, 2011 Table of ContentsPage Introduction3 External Environment3 Internal Environment18 Systems and Stakeholder Analysis32 Conclusion34 Problem Identification36 Generation and Evaluation of Alternatives37 Recommendation38 Decision Implementation39 References40 Introduction Delta Airlines was founded by C. E. Woolman, an agriculture extension gent (Anthony, Kacmar, & Perrewe, 2010). C. E Woolman was not a banker, venture capitalist or war pilot, as many of the competing airlines were. He didn’t have the aggressive military style that many of the other airline founders had. What C. E. Woolman instilled within the employees at all levels of the organization is that people matter and should be treated fairly and equitably. This philosophy led Delta Airlines to be the leader in customer service from the company’s inception through the many mergers over the years.
Through the difficult financial times when other airlines were laying off employees and filing for bankruptcy, Delta continued to pay their people well and keep them employed. There was an exception during the Ronald Allen CEO era of 1987 thru 1997. Human relations took a significant down turn during his tenure as CEO, especially during 1993 and 1994, but Delta decided to part ways with Allen and began repairing those fragile relationships with its employees. Delta Airlines still focuses on the human relations factor and has been able to repair the relationship with its employees, they believe it is their key to success.
External Environment General The airline industry is a fast growing sector demonstrating a very strong growth rate. It is associated with a number of social and economic benefits and is a growing contributor to the global inventory (Whitelegg, 2000). Industry Business cycles. Business cycles have a wide reaching impact on the airline industry; during recession, air travel was considered a luxury and therefore spending is cut which leads to reduced prices. The industry creates its impact not just by providing direct employment, but also through the creation of opportunities throughout the travel and hospitality sector of the economy.
Jobs in hotels, resorts, restaurants and car rental agencies are all impacted by the airline industry (Global Airline Industry Program, 2011). Airline industry. The airline industry itself is a major economic force, both in terms of its own operations and its impacts on related industries such as aircraft manufacturing and tourism. There are few industries that create the amount and intensity of attention that airlines receive, not only among its participants but from government policy makers and the media as well (Jacobson, 2004). Environmental impacts.
On the other hand, the airline industry has a number of environmental impacts that are experienced by local residents in the vicinity of airports and under flight paths. Noise has become a concern over the last 20 years as well as air pollution and the health effects associated with them (Whitelegg, 2000). The most significant impact in recent history was the 9/11 incident. After 9/11 the world economy plunged into to global recession due to the depressed sentiment of consumers. Immediate results were a huge drop in air traffic due to safety and security concerns.
With the new focus on homeland security in the United States, the terrorist attacks of 2001, a global recession, and anomalies such as the SARS virus; the airline industry had found itself in a state of turmoil (Airline Industry, 2010). The airline industry also lost income due to higher operational costs, low demand and increased insurance rates. This prompted the industry to lay off employees, which further fueled the recession as spending decreased due to the rise in unemployment. Social factors. Social factors and travel habits of people have very wide implications for the airline industry.
There are people from various income groups, and the airlines have to identify these individuals and should supply them accordingly. If the clientele are a low-income group then the airline needs to focus on mostly low-income clients and their habits in order to keep them satisfied. Balancing their clientele and managing their marketing mix is a major element of the airline industries success (Airline Industry, 2010). Technological factors. The growing uses of the Internet and advances in technology have provided many opportunities to airlines.
Many airline companies have introduced a service, through the Internet wherein the unoccupied seats are accessed one week prior to the departure. Also there are many other services available such as online ticketing, booking, updating flight information, baggage check-in and handling of customer complaints. As customers’ needs continue to change and future generations develop more expectations the airline industry will have to be ready to meet their customers’ needs (Airline Industry, 2010). 5-Forces Analysis Potential entrants.
It is difficult to enter into the airline industry due to the significant startup costs and regulations that involve landing rights and other government rules. New airlines often have trouble securing landing rights in other countries as well. However, if borrowing is cheap, then the likelihood of more airliners entering into the market increases. Although the airline industry has gone through some rough times, the market is still hot and demand is still high. Because of this, new entrants are always a threat to existing airlines.
As the number of airlines increase, prices tend to decrease because of competitive forces among the carriers. It would be unrealistic for Delta to assume that the market share it currently holds with other airlines is relatively safe. Foreign competitors to the United States’ that operate international airlines are starting to explore the possibility of extending flight operations on American soil. Brazilian Airlines Azul and Germany’s Lufthansa along with Air France and British Airways are considering making regular flights from domestic cities in America to other American cities (Shepherd, 2008).
With new competitors entering the marketplace, buyer preference to specific airlines will become increasingly important to the overall strategic success of Delta. Brand name recognition and frequent flier points play a significant role in the airline industry. An airline with a strong brand name and incentives can often lure a customer even if its prices are higher. Suppliers’ bargaining power. The Bargaining power of suppliers is high in the airline industry. It is dominated by Boeing and Airbus, who control almost 92% of the entire market of aircraft design and construction.
This creates little competition and a lack of industry intensification (Shepherd, 2008). This situation creates little rivalry and a lack of industry intensification. Because supplier power is greatest when they are few in numbers, the supply side of aircraft is somewhat set in stone. The ability for an airline to switch suppliers is limited and could incur extreme, bank-breaking costs. Although domestic airlines are somewhat restrained from gaining suppliers across borders, costs for commercial airliners are cheaper in Europe than the U. S. so Delta could look into this further.
With focus on the supply side of the industry, the likelihood of a supplier integrating vertically is not very likely since Airbus and Boeing have openly stated that their core competencies have no infusion with actually flying (Boeing, 2008). Airlines could integrate horizontally by consolidating with partners to order air planes in bulk so they can receive a larger discount on the order. Fuel is the most expensive commodity that the airline industry has to secure, and the bargaining power of the Organization of Petroleum Exporting Countries is (OPEC) very strong. They influence the price of fuel without consulting the airlines.
Labor union negotiating power is equally high. Buyers’ bargaining power. The bargaining power of buyers in the airline industry is very low. This can be attributed to the high costs involved with switching airplanes and the fact that airlines set ticket prices without allowing consumers to barter on price. In recent years the principle of threat credibility in buyer power force comes into play with the innovative ticketing websites that have been introduced; Travelocity and Kayak receive ticket information from all airline websites giving the consumer more buying power (Shepherd, 2008).
Rather than searching by luxury amenities (such as a fully reclining seat), nearly all consumers search on price. To lower costs, Delta has introduced low fares that can only be found on its website requiring customers to buy tickets directly from the website. The inability of the majority of airline customers to coordinate and organize lessens the power of individual buyers. The extent to which airlines can engage in price discrimination will differ depending on the route and type of customer.
Routes heavily flown by multiple airlines increase the availability of substitutes and therefore, are more likely to offer competitive prices. In contrast, flights with farther distances that have limited schedules and hubs can often be dominated by one or two airlines, which tend to overcharge customers. Threats from substitutes. Threats to the airline industry have been created as other modes of transportation have become more efficient; railway, boats, and motor vehicles are becoming the most prevalent substitutes for air travel.
The importance of these substitutes has declined drastically over time. Switching costs between air travel and its substitutes are fairly low; however, the relevant importance of substitutes will change according to the route, time, money, reason for travel, and the customer-type. With price-performance trade-offs in mind, ocean transportation is limited in its appeal, as it lacks the advantage of speed in transatlantic travels. This leaves railways and motorized transportation domestically, which includes passenger buses and cars.
These two modes have always been options that are easily substituted for air travel. With oil prices increasing at a regular rate and even more so jet fuel costs increasing, both airlines and road transportation seem increasingly unattractive for business or pleasure travel. Recent innovations in fuel-efficient vehicles and increased options from ground transportation companies, the travel industry is facing the hard realities that consumers’ price-performance evaluation and the industry wide price elasticity have led to a more complex travel industry (Shepherd, 2008).
Existing rivalry. Market intensity remains a significant factor affecting rivalry; routes, airports, and hubs served by many carriers experience intense competition. Profitable hubs are those set up in high traffic cities with high demand for air travel. Highly aggressive industries generally earn low returns because the cost of competition is high, so in order to gain profits, airlines must beat out the competition by offering as much or more flights with time flexibility to a variety of destinations (Reals, 2010).
Other factors contributing to rivalry incorporate high fixed costs, excess capacity, low differentiation, price wars, and readily available prices via the Internet. Due to the nature of the industry, high fixed costs are expected and this makes the net profit margins very narrow. Contributors to high fixed costs include the costs of planes, fuel, pilots, flight attendants, high-tech computer systems, the need to meet government regulations and hire experienced employees. To help recover these fixed costs, airlines have resorted to increasing ticket prices, charging for checked baggage, and increasing revenue for passengers per mile.
Minimal differentiation among airlines and switching costs for passengers also magnifies rivalry (Datamonitor, 2010). An example of switching cost is the cost incurred if individuals or corporations change airlines and forgo the benefits of adding frequent flier miles onto previously accumulated miles on another airline. The decision to go with a new airline becomes burdensome since miles between airlines cannot be transferred. Even though the introduction of the frequent flier programs was intended to increase customer loyalty, low cost airline strategies have diminished the effectiveness of these membership plans.
Competition has also increased greatly due to prices being readily available for comparison through the Internet. Current and future industry analysis. The airline industry has endured a number of years of low profitability, since the Airline Deregulation Act of 1978, (Datamonitor, 2010). Deregulation reduced airfares significantly and allowed many new firms to enter the market; the financial impact on new airlines was enormous. The airline industry, at this moment appears to be unattractive. The surging price of fuel is playing a significant role in the planning of flight schedules, ticket prices, and overall service.
In order to survive, airlines need to reduce their costs and increase their profits. Some airlines are now charging for checking in bags. Airlines are cutting services everywhere they can. Unlike after September 11th when demand was low and gas was cheap, airlines could lower ticket prices to stimulate demand and improve in-flight services to attract customers (Reals, 2010). Now even with record loads, airlines still cannot cope with the high price of fuel. With few choices, such as merging with other airlines or consolidating routes airlines may have to stand alone and hope for oil prices to drop.
The future of the airline industry may very well depend on the fact that competing airlines today unite into a few large conglomerates. When airlines merge, the consumer is the one who suffers. With mergers between airlines, various problems evolve such as the discontinuing of certain departure and arrival cities, competitive air fares are eliminated and the service provided could in fact diminish, due to the fact that the new airline, after the merger, has no immediate competition (Reals, 2010).
Regional airlines had to restructure post-9/11 when fuel costs soared and flight reductions caused companies to file for bankruptcy. Although the airline may continue to operate after filing bankruptcy, the fares that are charged to the consumer are not always determined by the airline. The entire operation of the airline is subject to approval of the bankruptcy board and as such, prices, flight times and even flight destinations are now governed by someone not directly related to the airlines (Shepherd, 2008).
The regional airline industry also faces other issues; President Barack Obama’s plan for a high-speed passenger rail system could be another point of concern for regional airliners. President Obama’s proposed rail system is also meant to lead the country into an era of clean, energy-efficient transportation which would mean airlines paying $1 billion to $2 billion to create a clean-burning airplane (Reals, 2010). This, at the moment, looks grim for the airline industry.
Bankruptcy for the airlines as an entire business is doubtful, for there will always be travelers wanting to fly from destination to destination. The future of the airlines has so much to do with outside influences on the airlines, it is believed that there will be more mergers and bankruptcies in the future, it is just a matter of which airline and when the inevitable will happen. Major Competitors 1. United Airlines 2. Southwest Airlines United Continental Holdings, Inc. company profile. United Airlines began in 1926 under the name of Varney’s, a commercial air mail service company.
The name changed to United Airlines in 1931(Datamonitor, 2010). Chicago O’Hare is the headquarters and main hub for United, with other hubs in Denver, San Francisco and Washington. Currently, United Airlines is number two on the top ten airlines regarding the number of seats filled each year, second behind Delta Airlines. “United Continental Holdings brings together the best of United and Continental to deliver leading customer service, meaningful profitability and sustainable long-term value for our shareholders” (United Airlines Company Information, 2011).
United, like any company, wants to be the best at what they do and capture as much of the market share as possible while increasing stockholders’ dividends. United Airlines merged with Continental Airlines on December 31, 2010, combining the second and third largest carriers respectively. Since the merger, this should place United Airlines ahead of Delta Airlines for number of seats filled during the year when the final figures are released for 2010. The two companies will continue to operate independently until they receive a certificate of merger which should come in late 2011 or early 2012.
Competitor analysis, objectives. United’s objectives are to continue growing their market share by continuing to offer the lowest fares where available (United Airlines Company Information, 2011). United Airlines is at the mercy of the United States’ economy. Business travelers have been finding ways to participate in company meetings through virtual meeting spaces such as Second Life or through video and teleconferencing. Many families have opted out of flying to their vacation destinations due to the economy being in a recession for the past two years and concerns of job security and a weak stock market.
Though the experts tell us that the U. S. economy is beginning to recover, and we are seeing evidence of this today in the strengthening stock market, it is slow for families that have lost portions of their income or lost their jobs. To date, we are experiencing a jobless recovery with high levels of uncertainty continuing for many Americans. United is hoping for an encouraging upswing in the economy as are other companies in every sector. United will continue to look for ways to reduce or manage costs. Competitor analysis, current strategies. United Airlines’ strategy is to keep their customers satisfied.
They have 13 different features or programs to entice business travelers to choose to fly with them, from Corporate Plus, Group Plus, Pass Plus, Perks Plus and Reward Miles to name just a few. They have a strong twelve point commitment to their customers which is proudly displayed on their website at www. united. com (United Airlines Company Information, 2011). United is working toward their goal of having the lowest fares available, getting customers safely and on-time to their destinations every time. United was first in on-time performance in 2009 and the first half of 2010. They were the first U.
S. airline to power their planes with synthetic fuels, thus reducing greenhouse emissions. They were also the first domestic airline to fly relief missions into Haiti. United Airlines fully believes in and participates in corporate responsibility. Of course, like any other airline, United is looking for ways to reduce costs or at least manage them in this economic downturn. Fuel and maintenance costs are a significant expense for any airline. United has a fleet of 13 different types of planes, which requires a large inventory of parts and knowledge base. Competitor analysis, assumptions.
United Airlines to will continue their membership in Star Alliance, of which there are 27 members worldwide. Star Alliance members operate over 21,000 flights daily to 916 destinations in 181 countries. This provides United Airlines the coverage they need to assist their customers traveling to destinations that United does not fly to. Continental Airlines, which finalized the merger with United Airlines on October 1, 2010, is also a member of Star Alliance (United Airlines Company Information, 2011). Competitor analysis, capabilities. Between the two companies, United and Continental, they now have ten hub ities in the United States and one internationally; Chicago, Cleveland, Denver, Houston, Los Angeles, Newark, San Francisco, Washington, Guam and Narita International Airport in Tokyo, Japan. United is a member of Star Alliance, a group of 27 members offering 21,100 daily flights into 181 countries worldwide. United was a founding member of this group and Continental became a member before the merger in 2010. This membership gives United’s customers access to flights around the world through their partner members, to locations they do not fly direct to. United Continental Holdings, Inc. as the most comprehensive route network of any domestic airlines (United Airlines Company Information, 2011): • 371 Destinations (airports) • 223 Domestic destinations (airports) • 148 International destinations (airports) • 59 Countries served • 5,811 Daily flights • 144 Million passengers per year (Continental and United combined) • 86,852 Employees • 1,254 Aircraft Competitor financial analysis. • P/E ratio is 25. 27 (companies expecting to announce higher earnings usually have a higher P/E ratio, while a lower P/E ratio means they are expecting lower earnings). Profit margin for 2010 was 1. 09%. • Total revenue for 2010 was $23. 23 billion. • Market capitalization is $8. 65 billion. • Return on Investment for 2007 was 15. 80%, 2008 was 4. 61%, and 2009 was 13. 94%. • Debt-to-earnings ratio for 2007 was 88. 48%, 2008 was 112. 66%, and 2009 was 115. 04%. With the increased D/E ratio of the past two years, it has become increasingly risky for banks to loan more money to UAL (Yahoo Finance, Industry Center, Major Airlines, 2011). Southwest Airlines company profile. Southwest Airlines began in 1971 by offering flights between Dallas, Houston, and San Antonio.
Southwest Airlines is the industry leading low-fare passenger carrier that operates on a point-to-point system versus the hub and spoke system that American, Delta, and United use (Datamonitor, 2010). “The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit” (Company, 2010). Gary Kelly, CEO Southwest Airlines, believes that their employees are the company’s single greatest strength that will continue their long-term competitive advantage.
Competitor analysis, objectives. Their objectives are to continue being the domestic industry leader in point-to-point, low-cost fares, while trying to take market share from its hub and spoke competitors. To accomplish this, they are reliant on the economy improving enough within the United States to entice people to begin flying again, and not just the business travelers, but families vacationing around the country. Southwest will continue to look for ways to reduce or manage costs. Competitor analysis, current strategies.
Southwest Airlines’ strategy is to keep their costs low so they may be able to continue to be the low-cost leader in the domestic airline industry. They limit their aircraft to one type, the Boeing 737, which allows them to control inventory and maintenance costs (Company, 2010). They also have a purchasing system in place that is quite stringent but loyal to those suppliers that help keep costs low and pass along those savings to Southwest. They also keep costs low by not offering some of the “extra” features and services that other airlines offer, such as first class seating and in-flight meals.
Southwest is also growing its territory by expanding services into Mexico. This will be the first international location that Southwest flies directly to without involving a partner. Competitor analysis, assumptions. Southwest loves their “culture”, which is “the development, improvement, and refinement of the originality, individuality, identity, and personality of a given people” (Company, 2010). Southwest offers low-cost fares into cities and so much more. They have the “Southwest Cares” program in which they offer monetary and in-kind donations, in addition their employees volunteer throughout their communities.
Southwest believes in being an active partner in the communities in which they serve. They will continue to put pressure on their competitors by being a good citizen within the communities in which they live and work. They hope their “goodwill” will lead to increased market share and in turn leading to increased revenue and profit. Southwest will also continue to place pressure on their competitors with the price of their fares, which can have a significant impact on the larger airlines such as Delta that cannot reduce their fares as low. Competitor analysis, capabilities. Southwest’s flights are direct, nonstop flights.
They do not operate on the hub and spoke system, which allows them to fly point-to-point flights into smaller airports, resulting in low-cost fares (Company, 2010). • 3,100 Daily direct flights • 72 Cities • 37 States • 35,000 Employees • 547 Aircraft Competitor financial analysis. • P/E ratio is 20. 31 (companies expecting to announce higher earnings usually have a higher P/E ratio, while a lower P/E ratio means they are expecting lower earnings). • Profit margin for 2010 was 3. 79%. • Total revenue for 2010 was $12. 10 billion. • Market capitalization is $9. 26 billion. • Return on Investment for 2007 was 17. 0%, 2008 was 39. 82%, and 2009 was 43. 62%. • Debt-to-earnings ratio for 2007 was 65. 38%, 2008 was 61. 77%, and 2009 was 59. 66%. Southwest’s has decreased their D/E ratio over the past two years, making it less risky for banks to loan money to them (Yahoo Finance, 2011). Assessment of External Environment Opportunities. • Web based reservations • Merging with other airlines • Co-sharing/partnering with other airlines • Increasing world market for aircraft maintenance repair and overhaul • Growing international market opportunities Threats. • International political disputes • Rising fuel prices Economic hardship • Competitors Pricing • High taxes and other government fees for the airline industry The writers of this case study have provided an analysis of the external environment which included a review of the industry and Delta’s major competitors. Now they will analyze Delta’s internal environment which will focus on the company profile, the market, the company’s current financial performance, core competencies and an assessment of the internal environment. Internal Environment Company Profile History. Delta airlines went from dusting crops to serving more than 350 destinations on six continents.
This once tiny airline moved its headquarters from Monroe, Louisiana to the exciting city of Atlanta, Georgia. Delta has become one of the world’s largest airlines, and Atlanta has grown into an international city and a global gateway. • 1920 Delta begins crop-dusting and flying mail • 1930 Delta begins passenger service • 1940 Delta goes to war and officially becomes Delta Air Lines, Inc. • 1950 Delta expands internationally, pioneers the hub and spoke concept • 1960 Delta enters the computer and jet age • 1980 Delta expands services and routes 1990 Delta purchases Pan Am and becomes a global carrier • 2000 Delta launches SkyTeam and merges with Northwest • 2010 Delta introduces a massive 2 billion investments and innovative services program (History, 2010). Employment. Delta, “As an equal opportunity employer, Delta recognizes that our strength lies in our people and we are committed to diversity. ” Delta Air Lines is an Equal Employment Opportunity / Affirmative Action employer and provides reasonable accommodation in its application process for qualified individuals with disabilities and disabled veterans (Delta, 2011).
Products. Delta Cargo Introduced harmonized core U. S. based shipments DASH, DASH Heavy, and Standard. Delta Cargo is taking the best characteristics of both carriers to establish the “best in class” product and rates. “Whether you are shipping within or outside the United States, or special items, Delta Cargo has a product for you, at a price you can afford”. Specialty Shipments are Delta Cares; Safe transport and protection of human remains, Live Animals, Perishables, Dangerous Goods and High Value and Firearms are also available upon request (Delta Cargo, 2011). Sales distribution. The industry faces substantial challenges from unprecedented revenue declines and volatile fuel prices, but Delta is the best positioned network carrier to weather these economic conditions” (Smith, 2009). Passenger revenue decreased 25%, or $2 billion, compared to the prior year period due to the global economic recession; an estimated $125 million to $150 million impact of the H1N1 virus and a 7% capacity reduction. Passenger unit revenue (PRASM) declined 20%, driven by a 19% decline in yield. Cargo revenue declined 54%, or $200 million, reflecting lower volume and yield due to the recession.
Freighter capacity was 50% lower year over year, as Delta continues to reduce capacity to achieve its plan of discontinuing all freighters flying by the end of 2009; other net revenue grew 15%, or $123 million, primarily due to increased baggage fee revenue and improved terms from Delta’s affinity card agreement with American Express (Delta Air Lines Reports, 2009). Location. Delta’s Headquarter in Atlanta operates a mainline fleet of more than 700 aircraft. A founding member of the Sky Team global alliance, Delta participates in the industry’s leading trans-Atlantic joint venture with Air France-KLM and Alitalia.
Along with its worldwide alliance partners, Delta offers customers more than 13,000 daily flights, with hubs in New York-JFK, Cincinnati, Amsterdam, Memphis, Atlanta, Detroit, Minneapolis-St. Paul, Paris-Charles de Gaulle, Salt Lake City and Tokyo-Narita. Delta is investing more than $2 billion through 2013 in airport facilities and global products, services and technology to enhance the customer experience in the air and on the ground (Corporate Information, 2011). Image. “Delta is firmly committed to our environment, safety, and social responsibility.
We demonstrate these commitments in hundreds of ways throughout the world on a daily basis as we partner with our employees, vendors, customers, civic, and non-profit organizations to make a difference in the communities where we live and work. Many of our programs are award winning and industry leading. We don’t do them for the awards. We do them because they’re the right thing to do” (Anderson, 2011). Below are some of the programs Delta utilizes to help their image: • Making the communities around the world better • Advancing global diversity Improving global wellness • Improving the environment • Promoting arts & culture “The spirit of giving embodied by Delta employee volunteers symbolizes the heart and soul of Delta people worldwide. It’s because of them that our company is recognized as more than just an airline. We are a leader in corporate social responsibility”. Scarlet Pressley-Brown Director-External Affairs & Community Relations and Delta’s Force for Global Good (Delta’s Force of Global Good, 2011). Internal politics. Human diversity is recognizing, appreciating, respecting, and leveraging.
Delta does this from the perspective of cultures, languages, ethnicity, gender, race, age, sexual orientation, education, religion, work experience, family status, capabilities, political views, geographic/regional identification, values, personalities, skills, education (formal and life), citizenship status, socio-economic background, community membership and communication styles. Diversity reflects a company’s outlook and the principles of their employees and how to tap the potentially significant contributions inherent in diversity.
In fostering an atmosphere of diversity throughout our entire worldwide operation, Delta is always proud to participate in and sponsor a variety of activities covering a complete range of lifestyles and perspectives (Our Global Reach, 2011). Market Market segments. Delta generates revenues through a single business division, air transportation which operates through two major business units, passenger and cargo (Datamonitor, 2010). Delta Cargo is one of the largest cargo carriers among the US passenger airlines, based on revenue.
The company generates cargo revenues in domestic and international markets primarily through the use of cargo space on regularly scheduled passenger aircraft. Delta Cargo is a member of SkyTeam Cargo, the world’s largest global airline cargo alliance. This partnership offers cargo customers a consistent international product line, and the partners work to jointly improve their efficiency and effectiveness in the marketplace. Delta operates two main market segments for its passengers: customers who are primarily seeking basic air transportation (leisure or economy class) and those seeking high performance and luxury (business class).
The business class is the more profitable one and the economy is the less profitable one. These two segments can further be broken down by average length of trip and frequency of trips, the international travelers and the domestic travelers (Delta Air Lines Reports, 2009). Business travelers are very profitable for Delta airlines because they tend to buy their tickets at the last minute when prices are higher and their schedules are not flexible enough to change flights. They often do not have time to go with a substitute means of travel.
Business travelers pay for the convenience and luxury factor. In an economic sense, the price is relatively inelastic. Delta offers business travelers great deal of service and amenities than leisure travelers. These include more room for work, telephone connections, and Wi-Fi connections so that business class passengers can continue to work on-board. A large number of business travelers can determine routes such a non-stop flights as opposed to the hub and spoke system. Due to the profitability of this value-added strategy, traditional airlines will focus on these routes as their money makers.
Leisure travelers are more willing to change flights and modes of travel based upon the prices; therefore they are not as profitable. The leisure traveler segment is very price elastic. This market segment requires a cost leadership method, which the traditional airlines like Delta are not prepared to compete in. Southwest airlines and other budget carriers will dominate this market and will probably in the end force out the traditional carriers like Delta who cannot match the low fixed cost structures of the budget airlines (Shepherd, 2008).
These two market segments require two different strategies. Although business and international travel are more profitable, Delta still has to minimize expenses while differentiating their service. Budget airlines will dominate the leisure traveler segment because they will offer a lower level of service and lower prices. Delta Airlines Current Strategy Generic strategy. Delta Airlines started out with and maintained a differentiation strategy for many decades, meaning they wanted to differentiate themselves from their competitors in some way. What made them unique was their customer service.
They were the first passenger carrier to introduce stewardesses in the cabin in the 1940’s. They also offered more “creature comforts” to passengers, such as meals, complementary drinks and snacks, bigger and more comfortable seats, more leg room between rows of seats, and lounges in the airport terminals. This strategy certainly differentiated Delta from many carriers, such as Southwest Airlines, whose strategy is to sell a seat from point A to point B for the lowest price in order to acquire market share and increase revenue. The first time Delta had an operating loss was in 1983.
During this time, management made the decision to keep the higher wages Delta was paying rather than reduce wages to cut labor costs and kept their no-layoff policy. The strategy kept the employees happy, but it hurt the company’s financial position. Delta went through another difficult economic period in 1993 and 1994. This time the new CEO, Ronald Allen, decided to implement the Leadership 7. 5 program. This program was developed to reduce the average cost per available seat per mile flown from 9. 59 cents per available seat mile to 7. 5 cents per available seat mile (Anthony, et al. , 2010).
This program did reduce costs and improved the balance sheet; however, it also devastated the relationship between the Delta employees and management that had been cultivated over the past 50 years. Other changes took place at Delta during this time. The company began transitioning to a mixed cost/differentiation strategy. They had to get rid of their no-layoff policy towards nonunion employees, reduced wages, reduced full-time staff to part-time staff and started cutting back on the “creature comforts” they were offering to passengers; all in an effort to become profitable again in the volatile economic climate.
Delta is still known today as one of the premiere domestic airlines. After their difficult economic times in the early to mid the 1990’s, they did begin to repair their tattered relationship with their employees. They re-hired some employees, returned others to full-time status, and gave wage increases to nonunion employees. Delta reported losses again in 2005 and 2006 at $3. 8 billion and $6. 2 billion respectively. In 2007, they were able to report a $1. 6 billion profit.
In 2008, they announced a 3% pay increase to 38,000 their front-line employees (Anthony, et al. , 2010). Corporate strategy. Delta’s strategy is to regain and maintain a strong competitive position, achieve long-term persistent profitability, and be successful for years to come in these changing economic times. Delta’s CEO is Richard H. Anderson, who is a 24 year veteran of the aviation industry, beginning his career with Continental Airlines in 1987. Delta’s President and Chief Financial Officer is Edward Bastian who joined Delta in 1998.
He is credited with leading Delta through their Chapter 11 Bankruptcy within 19 months, which is considered one of the largest and most successful in U. S. history (Anthony, et al. , 2010). Delta is expanding its international operations in two ways; the first way is by flying their own aircraft into more international cities and airports than any other U. S. airline, and second by continuing to build alliances with other carriers around the world. Delta entered into their alliances later than other carriers but they have quickly made up for it as they are a member of two alliances.
The first alliance is the Atlantic Excellence Alliance which began in the late 1990’s and consists of Austrian Airlines, Sabena, and Swissair. The second alliance was developed in 2000, the SkyTeam Alliance partnering with Aeromexico, Air France and Korean Air. Part of Delta’s early success in surviving the turbulent economic times during the early 1970’s when the oil embargo hit and the crude oil prices skyrocketed, was there management style. Many airlines were founded and operated by one man at the top and many times this person refused to give up control or to set up a succession plan.
When that one man was incapacitated, the company was usually unable to survive because a strong and experienced management team had not been developed. The founder of Delta, C. E. Woolman, did not want this to happen to his company. After suffering a heart attack, Woolman began delegating additional responsibilities and duties to the other board of directors and when it came time for Woolman to leave the company, Delta had experienced leaders and managers in place (Anthony, et al. , 2010).
Today, Delta still believes in having a strong leadership team. Another strategy of Delta’s is their modern fleet of jetliners. Before their merger with Northwest Airlines in 2010, their average age for a plane was 14 years old for their fleet of 460. After the merger with Northwest, they will have over 800 planes. To keep this competitive advantage over their competitors, Delta has signed a long-term contract with Boeing Company for 159 firm aircraft orders, with an additional 135 options and 418 rolling options through calendar year 2017.
This long-term plan will replace older aircraft of an average age of 21 years, and also reduce the number of aircraft types from seven down to three, thus reducing costs in maintenance, parts, scheduling and training (Anthony, et al. , 2010). Company’s Current Financial Performance Some of Delta’s financial data for the past four fiscal years can be found in Table 1, Delta’s Financial Performance, Past Four Fiscal Years. As you can see, Delta’s profitability has been improving over the past four years. Table 1 Delta’s Financial Performance, Past Four Fiscal Years (in Millions) 4th Quarter |2007 |2008 |2009 |2010 | |Total Revenues |19,154 |22,697 |28,063 |31,755 | |Gross Profit |4,074 |3,491 |4,582 |7,333 | |Operating Income |1,096 |113 |83 |2,667 | |Net Income |1,612 |(8,922) |(1,237) |593 | |Net Cash Flow |1,359 |(1,707) |1,379 |– | Note. Adapted from Bloomberg Business Week. (2011). Retrieved February 12, 2011, from Bloomberg: http://investing. businessweek. om/research/stocks/financials/financials. asp? ticker=DAL:US and Yahoo Finance. (2011). Retrieved February 12, 2011, from Yahoo! Inc. : http://finance. yahoo. com/q/cf? s=DAL+Cash+Flow&annual A comparison of revenue-related statistics for Delta Airlines and two of its major competitors, United Airlines and Southwest Airlines can be found in Table 2, Comparisons of Revenue-Related Statistics. The data indicates that all three airline companies had a profitable year, with Delta in the lead. The three airlines being compared are: Delta Air Lines (DAL), United Air Lines (UAL) and Southwest Air Lines (LUV). Table 2 Comparisons of Revenue-Related Statistics (in Millions) 2010 |DAL |UAL |LUV | |Total Revenues |31,755 |23,229 |12,104 | |Gross Profit |7,333 |6,806 |3,042 | |Operating Income |2,667 |1,645 |988 | |Net Income |593 |253 |459 | |Net Cash Flow |– |– |– | Note. Adapted from Bloomberg Business Week. (2011). Retrieved February 12, 2011, from Bloomberg: http://investing. businessweek. com/research/stocks/financials/financials. asp? ticker=DAL:US United’s fourth quarter revenue grew significantly in comparison to Delta and Southwest, as you can see from Table 3, Quarterly Revenue Growth 2010. Table 3 Quarterly Revenue Growth 2010 2010 |4th Quarter | |DAL |14. 5% | |UAL |101. 1% | |LUV |14. 8% | Note. Adapted from Bloomberg Business Week. (2011). Retrieved February 12, 2011, from Bloomberg: http://investing. businessweek. com/research/stocks/financials/financials. asp? ticker=DAL:US Delta’s fourth quarter financial statistics are looking quite strong, as shown in Table 4, Delta’s Fourth Quarter 2010 Financial Statistics by Percentage.
Table 4 Delta’s Fourth Quarter 2010 Financial Statistics by Percent |Statistic |DAL | |Gross Margin |23. 09% | |Total Revenue |13. 16% | |Return on Equity |123. 54% | |Gross Profit |60. 04% | Note. Adapted from Bloomberg Business Week. (2011). Retrieved February 12, 2011, from Bloomberg: http://investing. businessweek. com/research/stocks/financials/financials. asp? ticker=DAL:US
The financial data presented in Tables 1through 4 shows that Delta’s economic position in the airline industry is strong and growing. The writers now discuss the core competencies for Delta Airlines. Core Competencies Delta Air Lines core competencies include: • Passenger transport service • Cargo transport services • Aircraft maintenance services • Air-to-ground radio services • Charter flights • Pilot training program • Training and consulting services Delta is known for international travel, technology, and long-distance flights to a variety of popular destinations while providing luxurious amenities for passengers. Delta provides these services as one of the largest airlines in the world; despite the current merger with Northwest.
International travel and long-distance flights are a core competency for Delta because they specialize in these types of routes. Delta offers flights to over 65 different countries, which is the largest in the industry and it is the only major US airline that flies directly to Africa (Delta, 2011). This sets them apart from their competition and gives them a majority of the international market share in terms of U. S. airlines. Delta’s alliance with SkyTeam, the world’s largest global airline cargo alliance is essential because it offers cargo customers a consistent international product line, and the partners work to jointly improve their efficiency and effectiveness in the marketplace.
The alliance members, which includes Aeromexico Cargo, Air France Cargo, Alitalia Cargo, CSA Czech Airlines Cargo, KLM Cargo and Korean Air Cargo, offers a global network spanning six continents, therefore customers will always have a choice from the SkyTeam alliance destination list to choose from. Delta’s maintenance, repair and overhaul (MRO) operations, known as Delta TechOps, is one of the largest airline MRO’s in North America. In addition to providing maintenance and engineering support for the company’s fleet of nearly 800 aircraft, Delta TechOps serves more than150 aviation and airline customers around the world (Datamonitor, 2010). Delta’s technology is also above average in the airline industry. It has enabled Delta to establish the brand as an industry leader in some aspects including becoming a founding partner in Orbitz(Delta Airlines, 2009).
This allowed Delta to share information easily with the public, and also partnering with hotels and rental car companies to provide vacation packages to initiate flights. They offer self-check-in kiosks and other in-flight amenities that other airlines do not offer. They also have their executive lounges that are located in different airports and are available for all of their first class passengers for free and to the casual passenger for a fee. Assessment of Internal Environment Strengths. • Superior customer service has always been part of their culture • Strategic merger with Northwest Airlines enabling Delta to offer service to more than 367 destinations in 65 countries • Human resources, training and development Strong management; corporate succession plan and mentoring program • Cutting edge and innovative information technology • A committed focus on human relations • Loyal employees • Competitive wages, sometimes higher than the industry average • Strong benefits package • Number one domestic carrier flying to Europe, Asia and Africa • Strong international alliances (Atlantic Excellence Alliance and SkyTeam Alliance) to improve access to international markets • Only domestic airline flying to Africa Weaknesses. • Slow to react to alliances • Vulnerable to competitors’ price cuts/low-cost fares • Substantial price competition, Delta is not always able to complete on every route • High operating costs Air Line Pilots Association (ALPA) union, a total of 16% of employees are in a union • High indebtedness • Increasing consumer complaints, industry worst for 2010 with 2,228 complaints, up from 1,327 since the merger with Northwest Airlines compared to 1,533 complaints for United Airlines and 291 complaints for Southwest Airlines (Birmingham Business Journal, 2011). The internal environment analysis is complete and the writers will now provide an analysis of Delta’s systems and stakeholders. Systems and Stakeholder Analysis Competitors Delta has many competitors, though in this case study we are focusing on two of their major competitors; United Airlines and Southwest Airlines.
All three of these airlines are competing for market share in the airline passenger industry. It is a very competitive market that is greatly impacted by external forces; such as the United States and World economies and oil and fuel prices. All three of these competitors are trying to increase their market share through various means; customer service, reducing costs through economies of scale, temporary price reductions in air fares, labor cost management, profit, revenue and more. Consumers Delta has always endeavored to stand out from the competition through superior customer service. They were the first airline to introduce stewardesses in the 1940’s to serve the passengers in-flight beverages and snacks.
Their cabins had nice leather seats which were a little larger than the other airlines and were spaced a little further apart for more leg room. Delta had a twenty year run of having the fewest customer complaints in the industry. Of course, with the economic troubles over the years and the desire to compete with some of the lower fares carriers, they had to cut back on some the customer service features they had always been known for. Delta, once a laggard in their computer systems technology, is now a leader with their Customer Relationship Management Program. This system was developed to be state-of-the-art to manage the needs of their business customers.
It collects data on seat preference, meal preference, travel patterns, any special arrangements needed, and much more for their customers. They want to “know” their customers and provide superior service. Employees A primary focus for Delta Airlines has always been on human relations, with the exception of a ten year period of time in which CEO Ronald Allen made drastic changes to reduce costs and return the company to profitability through the Leadership 7. 5 initiative. Delta has always believed that if they treat their employees fairly, respectfully and equitably, they will produce superior customer service results. There does seem to be a correlation evidenced by this thought.
Delta had always placed a high value on employees by offering training, higher than industry average wages and a great benefits package, even during tough economic times and mergers. Due to this treatment, Delta had a run of 20 years in which they had the fewest customer complaints in the airline industry. During the challenging economic times of the early 1990’s, the company reduced employee benefits and wages to avoid bankruptcy. Once the company returned to profitability, the wages and benefits were also restored. Government Agencies Passenger airlines are regulated by the Federal Aviation Administration (FAA) and the National Transportation Safety Board (NTSB).
The FAA is responsible for airline safety which includes; pilot training and proficiency, health requirements for pilots; aircraft design certification and maintenance requirements, and the air traffic controllers. Congress has given the FAA its power to make rules (which are effectively, laws) regarding the industry and also for the FAA to act as judge, jury and executioner in airline safety matters. The NTSB on the other hand, is a separate agency without the powers that the FAA has. The NTSB’s role is to investigate accidents and make recommendations to prevent further accidents and violations (Boser, 1998). Labor Unions Throughout Delta’s history, they have believed in treating their employees fairly and equitably.
This kept the labor unions at bay for many years but that may change with the merger of Delta, primarily a nonunion company except for its pilots, and Northwest Airlines, whose employees have been unionized for over 65 years. There is a lot of money at stake, $22 million in annual union dues, and employees are voting whether to keep or join the union or reject it (Profile, 2011). So far the employees have rejected the union on eight out of eight votes. The company is willing to spend whatever it takes in the form of profit sharing in order to keep the unions out of Delta (Esterl, 2010). Public Interest Groups Public interest groups due have effects of the airline industry from wanting to reduce their carbon foot prints to reducing the number of older and noisier jets flying over their neighborhoods.
Delta is keeping an eye and ear open to these groups and updating their jet fleet with newer, quieter and more economical planes. Stockholders Stockholders keep a close eye on Delta’s operations as they affect their stock prices and dividend returns, as does the world and U. S. economy. The economic environment is beginning to improve but will continue to play a significant role in corporations both domestically and internationally as to how often they will allow business travel or will they seek out alternate methods for business meetings, such as video and teleconferencing. Stockholders have to be encouraged by the fact that Delta’s gross profits are increasing and operating losses are decreasing (Yahoo Finance, 2011). Suppliers
Delta is not the only airline company making purchasing decisions based on economies of scale; therefore, Delta’s suppliers have an interest in their operations as well. Suppliers are especially mindful of Delta’s expansion into new markets. For instance, when Delta expands its operations into another country, the suppliers will be planning for those logistical challenges in order to maintain their business with Delta. Suppliers will also track Delta’s passenger and flight volumes in order to be sure they have the products and services available to Delta when needed. The review of the systems and stakeholder analysis leads the writers of this study into the problem identification. Conclusion
The airline industry has gone through some very rough times during the last ten years but Delta has remained strong through it all. Delta’s innovations in cutting edge technology and customer friendly features like self-check-in kiosk has enabled it remain competitive in the market. Delta has learned a lot from their bankruptcy proceedings and has restructured their strategies, routes and business procedures to align with their new goals so as not to fall prey to insolvency. The rising cost of fuel is of great financial concern not only to Delta but to the entire airline industry and so Delta needs to find a way to differentiate itself and remain competitive against the offerings of the budget carriers like Southwest Airlines.
With the merger with Northwest Airlines, Delta hopes to increase its overseas market share and be able to grow to meet the challenges of the future in this competitive global airline industry and difficult economic environment. The writers have identified the problem in this case and will now discuss possible alternatives to the problem. Problem Identification Problem Statement The problem in this case is how to increase Delta’s profit margin by two percent within the next three fiscal years beginning January 1, 2012. Magnitude of the Problem There are some challenges Delta must overcome in order to increase their profit margin by two percentage points in the next three years.
Some of the challenges they will face are completely out of their control, such as the World and United States sagging economies, the devaluing of the U. S. dollar, and the volatile and high price of fuel. Other challenges that Delta may have some influence over are their relationships with labor unions, employee wages and benefit packages, training and development programs, relationships and contracts with suppliers, and alternative or improved technologies. Contributing Factors to Delta’s Problem The domestic airline industry is highly competitive. Delta is competing for a limited number of customers as are discount airlines, such as Southwest Airlines. Delta was the first passenger airline to begin using the hub and spoke system.
This system utilizes larger airports and terminals around the county and internationally. The larger airports typically assess higher fees on the airlines. In comparison, Southwest Airlines, which flies shorter, point-to-point or direct routes into smaller airports is assessed lower fees by the regional airports, thus Southwest is able to pass along these reduced costs in the form of lower fares. The economy plays a large role in the number of airline passengers each year. When the economy is good and unemployment numbers are relatively low, there are more passengers, both business and leisure travelers. When the economy is in a recession and unemployment is high as it is currently, there are fewer passengers.
Many leisure travelers look for alternate forms of transportation to reach their vacation destinations or they opt to stay closer to home which does not require air travel. Likewise, in slow economic times, businesses look for ways to reduce their travel expenses and turn instead to video and teleconferencing options for their meetings. Generation and Evaluation of Alternatives First Alternative Delta should increase its profits by expanding its international routes since it is more profitable in comparison to current domestic routes. Low cost carriers are making it hard for Delta to compete on the basis of achieving profits so it should reduce domestic flights and optimize the unused resources internationally.
Delta should pursue the Asian and transatlantic routes due to its rapid population and economic growth, especially China, which has one of the fastest growing markets and exciting destinations (Boehmer, Harris, 2010). Second Alternative Delta should increase revenues through ancillary income such as baggage fees and sky miles programs. Additionally they should upgrade their cabins with better seating, on demand video, and add more business elite seats on frequently flown routes (Jacobs, 2011). Third Alternative Delta should identify the routes that consistently have the greatest number of empty seats and choose three to twelve times per year to discount fares on those routes in order to fill the vacancies.
This may reduce the revenue per seat mile for each passenger on that flight; however, it will increase overall revenue per flight and reduce the operating costs per seat mile. Recommendation Specific Recommended Solution Delta should increase its profits by expanding upon international routes. Justification of Recommendation The ability of Delta to increase international flights to the Asian market gives them the greatest opportunity for success. The other two alternatives have the potential to increase revenue; however, the scale is not as promising. Ancillary services create revenue that help support the main industry and could have trouble creating the two percent increase that Delta is after.
Additionally, there can be some changes to domestic flights to maximize efficiency but it may not have a big enough impact to meet Delta’s overall goal due to the competition from low cost competitors. Because of the economic growth and opportunities for leisure and business travel in Asia, Delta can concentrate efforts on capturing a more profitable market. The international Air Transportation Association estimates that of the 800 million passengers expected through 2014, 214 million will be travelers on Chinese routes. Last year Delta saw its strongest growth in Asia, while international passenger revenue rose 22 percent, growth in the Asian market rose 38 percent (Jacobs, 2011). Delta also has the aircraft to support the increase and is creating more luxurious cabins for the intercontinental flight.
As they continue to form joint partnerships, revenues will increase due to shared expenditures. This option is the most viable option for Delta to increase profits by two percent during the next three fiscal years. Decision Implementation Currently through Delta’s membership in the SkyTeam Alliance, they have partnerships with China Southern, Korean Air and Vietnam Airlines serving the Asian countries. Delta should expand the number of cities these partners serve and look for other alliances that will further their coverage into the Asian markets (Delta, 2011). The writers of this case study believe that Delta should implement this plan beginning January 1, 2012.
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